The "Problem Child": Estate Planning Techniques to Minimize Post-Death Disputes

It’s the unfortunate, but common reality that not all families get along.

For the purposes of this article, we’re focusing on children and problems that can arise with certain children in your life where the parent-child relationship is strained or estranged. Whether problems with one or more of your children arises from personality conflicts, political or cultural differences, drug or alcohol abuse, love addictions or ongoing untreated mental illness some clients make the difficult decision to curtail gifts or remove an affected child as a benefactor of their estate. While these situations are invariably sad for family harmony, these situations are more common than the public realizes; however, there are several strategies for dealing with an estranged child in your estate plan. In contrast, this article does not address estate planning strategies for children who have certain involuntary conditions, whether mental or physical, that may be able to benefit from strategies that ensure they do not become ineligible for legitimate public benefits.

Irrespective of the reasons for the estrangement, the following are some common approaches for customizing your estate plan to reflect methods to deal with an estranged or troubled child in your estate plan:

• Outright disinheritance. If you have come to the conclusions that your relationship with you child and/or children is permanent and beyond repair, you can legally disinherit the child through provisions in your estate plan. Commonly, if you are leaving a child nothing, their disinheritance needs to be specifically mention the specific child in the will or trust and state in no uncertain terms that you are disinheriting him or her; failing to do so could make it easier for him or her to challenge the will. (It is also recommended that you specify whether you are disinheriting that child’s descendants if the estrangement from the children extends to their children or other descendants.)

However, disinheriting a child comes with a risk: First, on a personal level this may cause substantial harm among other child who were included, and may result in lifelong severance of family relationships. Second, from a legal perspective, the affect child or children may sue to contest the validity of the will or trust in court, which can cost your estate time, heartache and money. There are steps you can take to try preventing a will contest, including making sure your will or trust is properly executed, perhaps writing a letter to the estranged child to explain your reasoning, and removing any appearance of undue influence by third parties. Granted, there is no guarantee that this will persuade a scorned child from pursuing legal recourse, but awareness of these issues and consultation with a qualified attorney can help to mitigate these issue to the maximum extent possible. Irrespective, while some children may be indifferent, it should be expected that a disinherited child will experience common human emotions, often similar to stages of grief - but in my experience, most likely anger

• Smaller inheritance. If you don’t want to disinherit your child entirely or wish to make it less likely the estranged child will contest the will or trust, you may want to leave them an inheritance that is unequal when compared to other beneficiaries. Leaving a child a reduced inheritance may influence a child to avoid contesting the estate plan, especially if you include a no-contest clause (also called an “in terrorem clause”) in the estate plan. A classic no-contest clause provides that if an heir challenges the will and loses, then he or she will get nothing rather than the amount gifted. Ideally, it is smart to leave the heir enough so that a challenge is not worth the risk and costs of litigation versus the complete loss of the inheritance.

  Notwithstanding these clauses, several states, Arizona and California included, have provided the ability to contest these clauses so long as the child has “probable cause'“ to do so - however, the intent of the inclusion of these clauses is to dissuade (i.e. scare) dissatisfied children from attempting to contest a will or trust by putting their inheritance at risk if they indeed do not have probable cause to contest the terms of the estate plan.

• Put the inheritance in a restrictive trust. If the reason you do not want to leave your child an inheritance is because you are worried about how they will use the money, you can leave the child’s inheritance in an irrevocable trust managed by a third party trustee that will have unlimited discretion to make distributions as they see fit rather than allowing the child themselves to make distributions decisions. Additionally, you can provide suggestions to the trustee on when and how the trustee should disburse the funds in the trust, or make such distributions contingent upon certain achievements being met by the child. More simply, you can instruct the trustee to disburse the money in small increments or only if the child meets certain conditions, like staying drug or alcohol-free or obtaining and maintaining a full-time job.

Figuring out how to treat an estranged child in your estate plan is complicated and emotional. As Leo Tolstoy wrote in Anna Karenina, "Happy families are all alike; every unhappy family is unhappy in its own way." If this sounds like an issue present in your family, don’t hesitate to call Ganser Law Offices at (480) 930-5859 to discuss.

Irrevocable Dynasty Trusts: A Tax Efficient Generational Wealth Strategy

If you want to pass money to future generations without having it subject to gift and estate taxes, then a dynasty trust may be right for you. A dynasty trust allows trust assets to be used for the benefit of multiple generations while keeping the assets out of the grantor’s and the beneficiaries’ taxable estates. 

The main benefit of a dynasty trust is the avoidance of estate and gift taxes over many generations. In 2022, federal estate tax exemption is $12.06 million ($24.12 million for couples). Estates valued at more than the exemption amount will pay federal estate taxes, at a rate of between 18 percent and 40 percent. The lifetime gift tax exclusion – the amount you can give away without incurring a tax – is also $12.06 million in 2022. Note that you can give any number of people up to $16,000 each per year (in 2022) without the gifts counting against the lifetime limit. In addition, the generation skipping transfer (GST) tax affects assets passed to grandchildren. The tax is imposed even when property is left in trust for a grandchild. The GST exemption is the same as the estate and gift tax exemptions. If you transfer more than the GST exemption, the tax rate is 40 percent. 

Assets transferred to a dynasty trust are subject to estate, gift, and GST taxes only when initially transferred and only if they exceed federal exemption thresholds. While estate and gift tax exemptions are currently very high, in 2026 the exemption is set to drop to the previous exemption amount of $5.49 million (adjusted for inflation).

Another benefit of a dynasty trust is that the assets in the trust are protected from the beneficiaries’ creditors or in the event a beneficiary divorces. If the trust is properly structured, creditors cannot go after trust assets to pay the beneficiaries’ debts. 

How a dynasty trust works
A dynasty trust is an irrevocable trust, which means once it is created it cannot be changed. Funds transferred into the trust will be taxed if they exceed the lifetime gift tax exclusion. However, once funds are transferred to the trust, beneficiaries of the trust can pass assets to the next generation without those assets being subject to estate, GST, or gift taxes. In addition, the assets placed in the trust are removed from your estate and can grow outside of it. 

The trustee of the trust can be a beneficiary, but because the trust is designed to last for generations, it may make sense to have a professional fiduciary, such as a bank or other financial institution, serve as trustee. The trustee manages and distributes the assets in the way you set forth in the trust agreement. Usually, the trust provides for the beneficiaries’ support during their lifetimes. For example, it could direct the trustee to pay out income regularly, make periodic principal distributions, or make distributions contingent on the beneficiary’s need. 

The length of time the dynasty trust can continue to exist depends on state law. Some states allow trusts to run for hundreds of years or indefinitely, while others place limits on how long the trust can operate. Traditionally, the rule against perpetuities states that a trust can last 21 years past the death of the last beneficiary. However, many states, have opted out of the rule, allowing trusts to continue for many generations - in Arizona this period lasts for 500 years under Arizona state law. 

The general consensus regarding the downside of dynasty trusts is that they are inflexible. And while it’s true that once the trust is created, you lose access to the assets because they have been permanently gifted away, Arizona law provides the ability to modify irrevocable trusts through multiple methods, namely by utilizing a process called decanting, or through the use of a non-judicial settlement agreement. However, because dynasty trusts can potentially last for generations, they require specialized attention due to the sophisticated nature of their design to include considerable flexibility to ensure that they remain workable vehicle far after your death. 

Dynasty trusts are sophisticated instruments that must be designed correctly in order to provide benefits. Contact Ganser Law Offices to determine if a dynasty trust is right for you. 

Love in the Time of COVID-19

One of the world’s greatest novelists, Gabriel García Márquez, wrote the famous novel “Love in the Time of Cholera” in 1985. The theme of the book, while not expressly addressing a pandemic like COVID-19, compared the similarity between lovesickness and the cholera pandemic disease that was occurring in the years between 1880 and 1930. While it was in essence a novel about love and loss, written in prose reflecting Marquez’ latin romance sensibilities, it also addressed its character’s contemplation of their own death and reflection on their history and legacy.

It is a timely reminder then, as we all experience the isolation of the current pandemic, and the regular news regarding the pandemics breadth and depth, to begin considering how we can ensure the safety and security of our family, friends and loved ones — and to take care of our affairs, including our relationships, our finances, legal needs, or otherwise.

After personally experiencing the loss of a relative recently who did not have an estate plan, the necessity of planning has come into clear relief - namely, the enormous task of dealing with his possessions, his legal and financial affairs, and comforting and informing his family.

Accordingly, in order to provide some detail of what a proper comprehensive estate plan consists of, below I will illustrate ways in which certain documents can considerably ease the stress that will inevitably fall on your living family members upon your death.

Revocable Living Trust

Unlike a “Last Will and Testament”, which only addresses property that is owned in a persons individual name (and not property owned in joint accounts, joint tenancy (including joint tenancy or community property with right of survivorship), or beneficiary designated property(i.e. Life Insurance, 401k, IRA, etc.)), a Revocable Trust is a new vehicle that becomes the legal owner of an individual or couple’s assets.

By creating a Revocable Trust, a “Trustor” (the person creating the trust) transfers or beneficiary designates all of their assets to a “Trustee” (typically in a Revocable Trust the initial Trustee is also the Trustor). The Trustee holds the assets for the benefit of the Trustor(s) during their life, and then upon the Trustor(s) death, depending on the trust terms, the Trustee distributes or hold the assets for the benefit of the Trustor(s) chosen beneficiaries.

Unlike an irrevocable trust, a revocable trust can be changed and amended at any time (unless the Trustor is incapacitated due to dementia or another mental or physical ailment that makes them legally unable to deal with their financial affairs). Also, unlike an irrevocable trust, a revocable trust itself provides no specific tax or creditor protection features; however, if properly created and funded, it can avoid the need for an expensive and time consuming probate proceeding with the courts.

This “probate avoidance” feature is why a revocable trust has become the new centerpiece of most individuals estate plans in place of a traditional Last Will and Testament (because of the limitations of a Last Will and Testament discussed below).

Last Will & Testament

While most people generally understand the necessity of having a “Will”, most do not understand the a Will’s limitations, and/or steps that will be required to ensure that the wishes of a “Testator” (the creator of a will) are followed.

As discussed above, a Last Will & Testament only deals with assets that are owned in a person’s individual name (i.e. a bank account owned only by John Doe) - it does not deal with jointly owned property, or property that has a beneficiary designation. Further, even if a deceased person has a Last Will and Testament, a probate proceeding in the probate court (and the attendant arcane procedures, significant expense (which is typically greater than the cost of a well created estate plan with a revocable trust), and time consuming efforts) to transfer the deceased person’s assets to their chosen beneficiaries.

However, when a person creates a Revocable Living Trust, a Last Will and Testament is also created, with the distinction (from a plan that contains only a Last Will and Testament) that any property that was not legally transferred and funded to a Revocable Living Trust should be transferred to the Trustee to distribute pursuant to the terms of the trust. If assets are not funded to the trust during the deceased person’s life, a probate proceeding will be required to ensure that your assets will be distributed pursuant to the terms of your trust.

It should also be noted that a Will is typically where families with minor children make choices regarding who will be the Guardians and caretakers of their minor children if both parents are deceased.

Note: this document is different than a “Living Will”, which is discussed further below.

Durable Power of Attorney

A Durable Power of Attorney is a legal document that allows an “agent” to deal with your financial affairs while you are unable to do so, specifically when you are incapacitated or unable to communicate your wishes. With a Durable Power of Attorney your agent can continue to pay your bills, deal with investments and the like to ensure that your financial affairs are taken care of while you are unable to do so.

A Durable Power of Attorney is “durable” because it continues through any loss of capacity (whether a physical injury or disability or a mental disease, such as dementia).

One distinction that is poorly understood is that a Durable Power of Attorney ceases at the moment of the “principal’s death. Thus, while an agent may have had power of attorney during a person’s life, this power is extinguished at the moment of the principal’s death. After a death, an executor (known in Arizona as a “Personal Representative”) or Trustee will step into the shoes of the deceased person to deal with their financial affairs.

Another issue to be aware of is that many financial institutions are skeptical of Durable Powers of Attorney and may require further bank specific documentation before they will honor a Durable Power of Attorney.

Advanced Health Care Directive

While most Arizona attorney’s choose to create separate “Health Care Powers of Attorneys” and “Living Wills”, we prefer a form called an “Advanced Health Care Directive” that deals with all issues related to a person’s health care situation — from being alive and healthy, through sickness and final illness, along with wishes regarding the disposition of deceased person’s remains.

Like a Durable Power of Attorney, an Advanced Directive allows an agent to make both physical and mental health care decisions on your behalf when you are unable to do so yourself. An advanced directive also addresses your wishes regarding how you wish to be treated when you have a terminal or irreversible disease (typically known as a “Living Will”)

While this is necessarily the “scariest” document in an estate plan since it requires you to contemplate your own demise, it is a fundamental document in a well rounded estate plan because it allows a person to make their express wishes known to their family or other decision makers.

In a Nutshell

One of the most common refrains that estate planners hear from the public and our clients is that they do not want to discuss planning because it requires the contemplation of their own death - a “morbid subject”.

The bottom line is that while thinking about death is certainly a grim topic, the truth is that we all will eventually die, and engaging in estate planning allows you to get your affairs in order and spare your family the added grief of determining what you may have wanted rather than empowering them to follow your guidance about what you actually want. The reality is that without an estate plan, people knowingly or unknowingly place the significant burden of dealing with a person’s affairs squarely on their relatives or loved ones, which compounds the difficulty and grief surrounding a person’s death.

In other words, estate planning is a gift of LOVE to your family — not a boring, unnecessary or morbid exercise.

These thoughts are particularly true during this period we are currently experiencing with COVID-19 which spares no age group, gender, ethnicity, class of wealth, or otherwise.

Like the theme of the novel, this period intrinsically makes us take account of our life, and our preparedness for the unknown.